Energy

Post Crimea, Exxon's Partnership With Rosneft Feels Weird

A drilling rig at the Val Gamburtsev oil fields in Russia's arctic far north

Sometime this year, a team of deepwater oil engineers will probably start drilling in the Arctic Ocean. The team will likely be made up of Russians and Americans working for two of the biggest energy companies in the world: Houston-based ExxonMobil (XOM) and Russia’s state-owned oil giant, Rosneft.

As relations between Russia and the West sour over Russia’s apparent annexation of Crimea, ties between U.S. and Russian energy companies have never been stronger. The closest partners are Exxon and Rosneft. Not only are they exploring for oil together in the Arctic as part of a $500 billion joint venture formed in 2011, the two companies are planning to frack shale fields in Siberia, drill a well in the Black Sea, and start construction on a natural gas export terminal in eastern Russia. Exxon has such a good relationship with the Russians, last summer President Vladimir Putin awarded Chief Executive Officer Rex Tillerson the Order of Friendship during an economic forum in St. Petersburg.

In the two decades since the Cold War ended, the U.S. and Russia have forged some marginal partnerships in a handful of areas. Russian and American astronauts work together on the International Space Station. The Russian military helps the U.S. get equipment in and out of Afghanistan. But the strongest area of cooperation has come in the energy industry, where U.S. oil majors such as Exxon and Chevron (CVX) have entered into a number of joint ventures with Russia’s state-owned energy giants Rosneft and Gazprom.

These aren’t short-term deals either. Most projects involve exploring for oil and gas in extreme locations, and carry billion-dollar investments that aren’t likely to pay off for decades. As the U.S. and European Union ratchet up sanctions against Russia, it’s hard to see Chevron and Exxon being receptive to whatever pressure they may get from Washington to pull back from their newfound Russian comrades. After all, these companies may be headquartered in the U.S., but they derive much of their profits from operations overseas. Their fidelity is to their shareholders, not necessarily their government. In an infamous quote included in Steve Coll’s book on Exxon, Private Empire, former CEO Lee Raymond once said, “I’m not a U.S. company, and I don’t make decisions based on what’s good for the U.S.”

It’s hard to imagine the head of a big U.S. corporation saying something like that at the height of the Cold War. Raymond was operating in an age of full-throated globalization in the 1990s and 2000s. And while that sentiment might still make sense, these big energy deals between U.S. and Russian companies suddenly feel strange, and awkward given the geopolitical consequences of Russia’s invasion of Crimea.

“It certainly casts a cloud over these large joint ventures,” says Lysle Brinker, who researches integrated oil companies at IHS Energy. As Russia and the West engage in what will probably devolve into a tit-for-tat chess game of sanctions over the next several months, any assets or project that has a U.S. or European Union partner attached to it could be subject to pressure from Moscow, says Brinker. Maybe not a direct sanction, but certainly an indirect one. In other words, if the West starts to push too hard with economic sanctions, could the Kremlin start making life hard for some of these Western companies doing business with state-owned Russian companies? “I think that’s a very real scenario,” says Brinker. And if so, does Exxon lobby the White House to tone it down?

We’re already seeing the early signs of how this may play out. Rosneft chief Igor Sechin is essentially issuing warnings to the U.S. over meddling too much in Crimea, saying that expanding sanctions would “only make the conflict worse.”

It’d be one thing if these were private entities U.S. energy companies were dealing with. But essentially the Kremlin is Exxon’s partner. The Russian government has a direct interest in tapping Western technical expertise to help boost its oil and gas reserves, which are of course the source of its power. In a way, you could argue that by partnering with Rosneft, Exxon is strengthening Russia’s strategic position, and helping increase the size of the energy stick that Putin carries.

On the other hand, the case can be made that the U.S. should cherish these business relationships. Let the Kremlin and White House poke at each other, but as long as Russian and U.S. companies can find common ground and forge long-term partnerships, isn’t that a sign we’ve not reverted entirely back to a Cold War footing?

That’s essentially the view of Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution. Ebinger worries that Congress, especially its more hawkish members, will get carried away with nationalistic fervor and look to impose much harsher sanctions against Russia, and that a White House tired of looking weak will be all too happy to oblige. “It’d be very dangerous to overreact to this,” says Ebinger. “Things could get out of hand on the sanctions front, and then no one benefits.”